WEAKNESSES

RISK ASSESSMENT

Tourism and infrastructure projects as drivers of activity

Activity is expected to pick up momentum in 2018, buoyed by investments in the tourism sector and public infrastructure projects, even if this will not be enough to significantly improve the population’s living conditions:, the IMF considers that 6% growth is needed to have an impact on the poverty rate.

Private consumption is likely to be sustained by the development of tourism, which will bring down unemployment and boost household income, and by moderate inflation. Nonetheless, the rise in household disposable income will be limited by the introduction of new taxes (in particular VAT) and by cuts to civil service salaries. Public spending will be concentrated on infrastructure (transport, energy) as well as on other sectors like tourism or agriculture, in order to foster employment and competitiveness and accordingly reduce the poverty rate. Tourism will also benefit from the modest increase in activity in the euro zone, the country’s leading trading and tourism partner. The country’s economic activity is, however, likely to be curbed by its insularity and limited natural resources.

Inflation is expected to remain stable thanks to the stabilisation of oil prices forecast for 2018. It will also remain well below previous levels (16% in 2010), especially thanks to the pegging of the dobra to the euro, introduced in 2010.

Large twin deficits despite international aid

Although remaining very high, the budget deficit is expected to decline in 2018, because a better performing tax system will help boost revenues. However, weak government revenue means there will still be a need for international aid, authorised in the form of donations (notably from Asian countries) or concessional loans (IMF, World Bank). This aid will represent almost half of total government revenue. The government was also forced, in July 2007, to accept an austerity plan proposed by the IMF aimed at reducing a proportion of public spending, namely by cutting civil service salaries and pensions. Public debt will fall very slightly after several years of climbing sharply, but will remain at very worrying levels given the share of foreign debt (90% of the total), even though the foreign debt is mainly concessional.

The current account deficit will continue to decline gradually, even though the country remains highly dependent on imports and suffers from a lack of export diversification. The reason is that the strong fall in cocoa prices (the main export product) at the end of 2016, is still weighing on the trade balance, with only a modest price rise expected in 2018. The trade balance will continue to show a large deficit in connection with higher commodity prices and dynamic capital goods imports. The improvement in the services balance, through tourism, will be the main factor behind the reduction in the current account deficit.

Meanwhile, the reasonable level of foreign exchange reserves (5.1 months of imports) will help maintain the dobra’s peg to the euro in the short term.

A favourable political context but with diplomatic tensions

The absolute majority obtained by the IDA (Independent Democratic Action) in the October 2014 elections brought political stability. Prime Minister Patrice Trovoada could, therefore, with his party, be the first government leader to complete his term of office (in 2018) since 1990. Further, the July 2016 presidential elections confirmed this stability, as it was Evaristo Carvalho, a member of the IDA, who was elected to lead the country. In this semi-presidential regime, the fact that the Prime Minister and the President are from the same party gives the government plenty of leeway to reform the country. During the upcoming parliamentary elections in 2018, the IDA is expected to hold on to its majority in Parliament, even though it will be narrower due to the unpopular austerity measures and the growing strength of the opposition.

Diplomatic relations with Taiwan (the country’s main donor) were broken off because of a port project due to be delivered in 2019 (total cost estimated at USD 800 million or 2.4 times GDP) which will be partly funded with financial support from China to the tune of USD 120 million. In April 2017, the country even signed a co-operation agreement with China, which committed funding over 5 years for infrastructure projects in the country worth USD 146 million in exchange for recognising the One-China policy to the detriment of Taiwan.